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Dovishness in the minutes of the Fed's July policy meeting softened the US dollar, and gold is climbing back towards a test of key resistance partly on 'stranger and stranger' developments in Washington.

The local market followed Wall St's lead to open softer as investors considered the possibility of a rise in US rates after better-than-expected manufacturing data.

At the 10.15am (AEDT) official market open, the benchmark S&P/ASX 200 index dipped 15.7 points, or 0.29 per cent, to 5,462.8, while the broader All Ordinaries index gave back 15.1 points, or 0.27 per cent, to 5,549.7.

Sterling slid after Theresa May stoked speculation the nation is headed towards a Brexit scenario involving limited access to the EU’s single market. Photo: iStock

Government debt fell with stocks after data showing expansion in US manufacturing bolstered wagers that the Federal Reserve will raise interest rates this year. The pound slid on concern Britain may face a so-called hard Brexit.

Treasuries declined across maturities and the S&P 500 Index fell following three straight weekly gains. UK shares climbed the most among western-European markets as the weaker currency boosted exporters, with Prime Minister Theresa May saying the country would begin to exit the European Union next year.

Colombian assets sank as the government’s failure to gain popular support for a peace deal fueled speculation it won’t be able to deliver key tax reforms. Oil rallied as traders mulled last week’s shift in Opec policy.

Traders are keeping a close watch on US economic reports this week, scouring data for clues as to the timing of a potential US Federal Reserve rate increase. New orders and production swung into expansion territory last month, indicating gradual improvement across America’s manufacturing landscape. At the same time, factories continued to focus on becoming leaner by trimming inventories and cutting employment. Later this week, a key jobs report could show a pickup in the pace of hiring, according to economists surveyed by Bloomberg.

While the US central bank decided last month to wait for stronger signs of growth before raising rates, some officials have since publicly endorsed a hike in the near term amid signs of a tightening labour market and expectations that inflation would move closer to the Fed’s 2% target. Traders are pricing in 60% odds of Fed action in December, up from 51% a week ago.

Fed Bank of New York President William Dudley suggested the central bank should be cautious in raising interest rates. Noting concerns from some economists that the risk of a recession is increasing, he told a central-banking seminar hosted at his bank that the Fed may have limited room to cut rates in the event of a downturn in the next few years. That may fuel the need to turn again to unconventional policies, such as purchasing bonds.

The S&P 500 Index lost 0.3% to 2,161.20. Financial shares in the benchmark index lost momentum after jumping the most in eight weeks on Friday.

The reporting season unofficially starts in about a week, when Alcoa Inc. posts results. Analysts forecast a drop of 1.5% in S&P 500 company profits in the third quarter, which would mark a sixth consecutive decline.

Britain’s megacap stocks rose to their highest level in more than 16 months, with companies that get most of their revenue outside the UK contributing the most to gains in the FTSE 100 Index. HSBC Holdings Plc, Royal Dutch Shell Plc, GlaxoSmithKline Plc and British American Tobacco Plc all advanced at least 1%.

Emerging-market shares extended their best quarterly performance since 2012 as a strong Chinese manufacturing reading eased anxiety over the world’s second-largest economy. Egyptian stocks soared as investors bet that policy makers may devalue the country’s currency, luring back foreign investors.

Saudi Arabia’s benchmark, which fell to the lowest level since 2011 on Sunday, has lost about $30bn since the nation last week announced a series of cuts to government salaries and bonuses as part of efforts to slash spending.

Exchanges in China, Germany and South Korea were shut for holidays on Monday. Asian index futures foreshadowed a mixed picture for Tuesday, with contracts on Japan’s Nikkei 225 Stock Average diverging despite losses in the yen.

Ten-year US yields rose three basis points, or 0.03 percentage points, to 1.62%. The yields on two-year bonds, which are most sensitive to Fed expectations, advanced three basis points to 0.79%.

Benchmark securities posted their first back-to-back declines in two weeks. The US manufacturing report will be followed by data on services and factory orders, while the non- farm payrolls numbers are due out on Friday.

Treasuries advanced last week as mounting concern over the financial health of Germany’s Deutsche Bank AG roiled financial markets and fueled demand for the safest assets. Those bond gains were pared on Friday on a media report that the lender was nearing a settlement with the US Department of Justice that was less than half the amount initially requested.

Italy’s yield spread with Spanish securities widened to the most in almost two years after an opinion poll showed that the constitutional referendum, on which Prime Minister Matteo Renzi’s political fate hangs, is too close to call.

Sterling dropped 1% to $1.2842, the most among its 16 major peers. British financial-services companies will get no special favours in Brexit negotiations, according to three senior figures in Prime Minister May’s administration. The government will refuse to prioritise the protection of the sector after the UK has left the EU, the people said.

May told delegates at her Conservative Party’s annual conference at the weekend that she’ll curb immigration, stoking speculation the nation is headed toward a Brexit scenario that involves limited access to the EU’s single market.

The Bloomberg Dollar Spot Index, which tracks the US currency against 10 major peers, rose 0.1%.

Colombia’s peso weakened 1.7% versus the dollar after citizens narrowly rejected a peace agreement with Marxist guerrillas by 50.2% to 49.8% in a weekend ballot.

West Texas Intermediate crude climbed 1.2% to $48.81 a barrel after rallying 8.5% last week. It was the highest close since July 1 and followed a 7.9% jump in September.

While the Organization of Petroleum Exporting Countries outlined an accord to curb output by as much as 750,000 barrels a day last week, Libyan production rose and will advance further this month, according to an official of the state oil company.

Gold futures for December delivery slipped 0.3% to settle at $1,312.70. Nickel slid 2.1% in London, leading losses among industrial metals.

Source: Bloomberg, TradingFloor.com

Local markets

Bank of New York Australia ADR Index up 0.7%, BHP Billiton ADR up 0.6% to A$22.71 equivalent, broadly in, line with last Australia close, Rio Tinto ADR up 0.5% to A$43.73 equivalent, ~16% discount to last Australia close

Gold futures for December delivery slipped 0.3% to settle at $1,312.70, as the dollar gained on stronger-than-expected US manufacturing data. Spot gold reversed gains to fall 0.3% to $1,311.54, with volumes muted as China markets were closed for the National Day holidays October 1-9. The rise in oil, along with the dollar, is eroding the appeal of bullion as an alternative asset. Gold stocks were down 2.33% in Toronto on Monday. Gold stocks: GOR, NCM, NST, AQG, EVN, KCN, RMS, RRL, SAR, SLR

Oil advanced to a three-month high in New York as traders continued to assess last week’s change in Opec policy. West Texas Intermediate for November delivery rose 57 cents to $48.81. It’s the highest close since July 1, breaking the 100-week moving average last week on a closing basis. Total volume traded was 17% below the 100-day average. Brent for December settlement increased 70 cents, or 1.4%, to $50.89, closing at a $1.49 premium to WTI for December delivery. Today’s close is the highest since August 18. The November contract fell 0.4% to expire at $49.06 on Friday. Oil stocks: WOR, WPL, STO, SEA, BPT, OSH, HZN, DLS, AWE, KAR, ORG, SXY

Iron ore dropped to a whisker above $US55 on Monday as one credit ratings agency offered a bearish view of the commodity’s short- and long-term outlook. The move comes as Fitch Ratings estimated an average price for the commodity of $US45 per tonne, both in 2016 and over the long term. The world’s largest iron ore producers will need to exert tight control over supplies to keep prices at about $45 a metric ton as China’s drive to weed out unwanted steel capacity poses risks to demand. The commodity’s rally in 2016 may also come under pressure as consumption in China is poised to weaken in the coming years. Iron ore stocks: FMG, BHP, GBG, GRR, MGX, RIO, BCI, SDL

Copper for delivery in three months rose 0.4% to $4,882 on Monday. The metal will surge more than 40% through 2020 as the global market swings to a shortage, according to Japan’s biggest producer, whose views echo those of Citigroup Inc. last week. While copper has increased just 3.8% in 2016, trailing double-digit increases in other LME contracts, prices had their best month in September since early last year, rising 5.4%. Stockpiles tracked by the LME are up more than 160% in the past six months, just as inventories on the Shanghai Futures Exchange slumped, signalling movement of reserves out of China into LME warehouses in Asia. About a tenth of the world’s nickel supply is at risk after the Philippines widened a crackdown on miners, raising the chances of prices rallying by another 25% through 2017, according to UBS Group AG, which had already billed the metal as one of its favoured commodities. Zinc increased for a sixth day, climbing 0.5% to $2,389 a ton. Tin advanced as much as 0.6% to extend its best quarterly performance since 2013, aluminium was flat. Copper stocks: PNA, OZL, SFR; Nickel stocks: IGO, WSA; Aluminium stock: AWC

Evolution mining (EVN) formed a clear uptrend during last month but the September high of 2.60 coincided with the 50% retracement between the July high of 3.10 and the August low of 2.10. Both gold and silver have been showing weakness in recent weeks, therefore a break below this uptrend could trigger further pull-back towards the gap at the support level of 2.29. We would look to buy either on the break above 2.60 or retracements near 2.29.

EVN daily chart

AUS200 & AUDUSD

AUS200 is showing resilience below the key resistance level of 5,500 as the energy and banking stocks rise higher. The price action of US500 is more interesting as it is converging to trade within a triangle, so we expect a break-out which can go either direction in the near term. Uncertainties around Deutsche Bank are still lurking but crude oil is looking strong as it is about to break the August high of $49.11, so further upside momentum in the equity indices is possible.

AUS200 daily chart

Since the false break below the 0.76 handle last Friday, AUDUSD is gaining strong momentum towards the key resistance level 0.77 handle. A better than expected US ISM manufacturing PMI failed to drag down AUDUSD and the obvious focus today would be on the RBA rate decision at 2:30pm AEDT. The probability of a rate cut is extremely low but the forward guidance should be closely watched. The recent price actions have convinced us to be biased to the upside but we would like to see a daily close above 0.77 first before we confirm a genuine break-out.

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